S E C R E T SECTION 01 OF 02 VILNIUS 000618
SIPDISSIPDIS
DEPT FOR U/S SHINER, EUR/FRIED AND EB/WAYNE/SULLIVAN
DOE FOR HARBERT
DOC FOR 4231/IEP/EUR/BOHIGIAN
NSC FOR GRAHAM, MCKIBBEN AND COEN
TREASURY FOR LOWERY, LEE AND COX
E.O. 12958: DECL: 07/02/2021
TAGS: PRELEPETECONLH RU VE
SUBJECT: TWO RUSSIAN OIL SUPPLIERS CANCEL JULY CRUDE
SHIPMENTS TO LITHUANIAN REFINERY
REF: A. VILNIUS 609
Â¶B. VILNIUS 512 AND PREVIOUS
Â¶C. VILNIUS 285
Â¶D. WARSAW 1336
Â¶E. KELLY-PEKALA 01 JUL 06 E-MAIL
Classified By: Economic Officer Scott Woodard for reasons 1.4 b and d
Â¶1. (C) SUMMARY: RosNeft and Vitol have cancelled their crude
shipments to Lithuania's Mazeikiu Nafta oil refinery (MN) for
July, leaving the refinery with only half of the crude it
expected to process this month. The shortfall will affect
Latvia and Estonia as well as Lithuania. MN, which currently
brings in all of its crude via pipeline from Russia, has the
technical capability to use its Baltic Sea terminal to
offload crude from tankers and transport it by pipeline to
the refinery. Arranging the supply and transportation
contracts for this change, according to MN's general manager,
would probably take at least a month, and the refinery only
maintains stocks sufficient for about six days of operations.
GOL officials will consult with PKN Orlen this week to
discuss the situation. END SUMMARY.
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SOME RUSSIAN SUPPLIERS CUT CRUDE SHIPMENTS
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Â¶2. (C) MN General Manager Nelson English (protect) told us on
June 30 that Vitol had abruptly and inexplicably cancelled
its contract June 29 to supply 200,000 tons of crude to MN in
July. English, an Amcit who has always shared the latest MN
information with this Mission, told us on July 3 that RosNeft
cancelled its July contract on June 30 to supply 200,000 tons
of crude. This, English explained, left MN with only half of
the crude supply it expected for July: 409,000 tons. (English
explained that the vast majority of MN's supply agreements
are spot or spot-like contracts that do not have penalty
clauses for non-performance, which gives suppliers the
ability to break the contracts relatively cost-free.)
English said that Transneft told him that it might be able to
find an additional 200,000 tons for MN.
Â¶3. (C) This turn of events was a surprise for English. As of
June 28, he said, MN was completely booked for July; it had
contracts to process 800,000 tons of crude during a month
with traditionally high margins. During our June 30
conversation, he said that MN already had contracts for the
third quarter amounting to 90 percent of the refinery's
capacity. He said that MN's main suppliers were Lukoil,
Vitol, TNK-BP, and RosNeft.
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MANAGING A CUT-OFF
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Â¶4. (C) English told us on June 30 that using the Butinge
terminal to bring crude to MN posed no technical challenges.
He said that it would take a maximum of 24 hours to make the
engineering changes necessary to reverse the flow and pump
oil from tankers to the refinery. The difficult part, he
said, would involve the commercial arrangements, including
negotiating new supply and transportation contracts. He
explained that these arrangements would take a month or more
to finalize. He emphasized that reaching agreements with
suppliers would be especially difficult and costly in a
situation where Russia had cut off supply, because suppliers
will know that MN is in a tough situation and will therefore
drive a harder (i.e., more expensive for MN) bargain.
Â¶5. (C) English said that his most immediate concern in a
cut-off situation would be securing supply for the Baltic
market. Forty percent of MN's production stays in the
Baltics, he said, and MN only maintains an inventory of crude
that would allow it to keep refining for about six days. He
added that there is probably not enough supply (of crude and
refined product) in the local market at present to supply the
Baltic market for a month. Company officials told us in May
that MN supplies approximately 95 percent of the Lithuanian
market and 70 percent of the Latvian and Estonian markets.
VILNIUS 00000618 002 OF 002
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INTERPRETING LUKOIL'S RECENT COMMENTS
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Â¶6. (C) Asked to comment on Lukoil VP Leonid Fedun's June 28
statement that Lukoil planned to cease shipping crude to
Lithunia (ref A), English said that he thought that Lukoil
was irritated that MN had increased the number of (Russian)
suppliers it contracted with, reducing Lukoil's importance as
a supplier. English told us that Lukoil supplied about 26
percent of MN's crude in 2005, but that this figure had
dropped to 14 percent at present. Fedun's statement was
especially surprising, English said, because Lukoil had
recently told MN that it would like to double the amount of
crude it supplies to the Lithuanian refinery.
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STILL WORKING ON NEW SOURCES OF SUPPLY
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Â¶7. (C) English told us that he would be traveling soon to
Venezuela to continue negotiating with PDVSA as a possible
crude supplier (ref c). The Venzuelans, he said, were "not
much easier to work with than the Russians."
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GOL REP WILL VISIT WARSAW
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Â¶8. (C) Saulius Specius, adviser to the Prime Minister and one
of the GOL's main negotiators on the sale of MN to PKN Orlen,
told us on July 3 that he was rushing to Warsaw later that
day to consult with PKN Orlen officials. We will contact him
for a readout when he returns to Vilnius later this week.
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COMMENT
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Â¶9. (S) The worst-case scenario for Lithuania -- a complete
cutoff of Russian oil starting July 1 -- did not occur, but
the canceling of half of the refinery's July supply contracts
does not bode well for MN or for the energy security of the
three Baltic republics. Neither MN nor we know why RosNeft
and Vitol canceled their contracts, but the timing, soon
after Fedun's statements and the information received by the
GOL (ref a), is striking, to say the least. So too is the
fact that Lukoil, despite Fedun's comments, has not canceled
its July contract. Perhaps that shoe is yet to drop.
KELLY